Global challenges, digitalisation, sustainability and changing business models, to name a few, are creating new options and limits for tax competition with new opportunities for an “aggressive” tax planning. The suggested EU’s “tax action plan”, consisting of tens of Commission’s initiatives is a timely proposal to be implemented in the coming financial period to make taxation fairer, simpler and more adaptable to modern technologies. The “plan” is designed to ensure that both the EU-wide and the states’ taxation policies would support a swift economic recovery and provide for sufficient public revenues for a long-term growth in the states. The EU’s share in the states’ tax regulation is, mainly, in the indirect taxation, e.g. VAT, excise duties, trade with the “outside world”, etc. While the member states’ sphere of competence is in direct taxation, i.e. personal and corporate taxation; and while balancing between the two, some “regulatory” controversies and problems have occurred.
There are numerous corporate taxation initiatives on the member states level to increase national revenues: one of the most popular is within a “separate” government’s agreements with multinationals on a reduced taxation rate in exchange for a “registered domain”; so-to-say, better something than nothing…
The practice has been widely used in the member states and often condemned by the EU’s authorities, though only on “political” ground; in strictly legal sense these initiatives are not against EU law. The multi-nationals can be persecuted and fined generally (and often, only) on the ground of “abuse of dominant position”.
Recent Commission’s moves to force the Apple Co. to pay for gross underpayment of tax on profits earned among the EU states during over a decade (2003-2014) is a vivid example of a problem. The American internet company (with the headquarters in California) used two off-shore companies incorporated in Ireland to reduce its tax burden to a fraction of one per cent.
Corporate taxation in the EU
The corporate taxation is the most notorious issue in the EU: it’s estimated that about €35 billion of losses each year in the EU states are due to corporate tax avoidance only.
A recently suggested EU’s package is the first part of a comprehensive and ambitious EU tax agenda for the coming years: e.g. the Commission is going to elaborate new approaches to business taxation to include challenges inspired by the digital economy’s transition and ensure corporate protection with the global multinationals.
For example, in the new European challenges inspired by the “green deal’, the Commission intends to make proposals to ensure that taxation supports corporate efforts in the EU’s objective of reaching climate neutrality by 2050. This multi-faceted approach to reforming EU and the states’ taxation aims to make taxation fairer, greener and fit for the modern economy, thus contributing to another EU’s challenge, e.g. sustainable, inclusive growth.
The new package is built on the twin pillars: fairness and simplicity. The former (as the EU’s top priority) rests on protecting public revenues, which will play an important role for the member states’ economic recovery in the short term and prosperity in the long term.
The simplicity focuses on simplifying tax rules and procedures and on improving business climate in the states, which also includes removing tax obstacles and administrative burdens for taxpayers in many sectors, so that it is easier for companies to thrive and grow in the EU “single market”.
Hence, the tax package seeks to boost tax fairness, by intensifying the fight against tax abuse, curbing unfair tax competition and increasing tax transparency.
The Commission is of the opinion that “now, more than ever, the states need secure tax revenues to invest in the people and businesses that need it most” (the EU executive vice-president, Valdis Dombrovskis underlined recently). He added, however, that the EU, at the same time, needed breaking down tax obstacles while making easier for EU companies to innovate, invest and grow. Thus, the new tax package takes the right direction towards both fairer taxation and a user-friendly one in a digital world.
Paolo Gentiloni, Commissioner for the EU economy was unanimous saying that “fair taxation is the springboard that will help states’ economies bounce back from the crisis”. It is part of the EU institutions’ work to make life easier for honest citizens and businesses when it comes to paying their taxes, and harder for fraudsters and tax cheats. Therefore, he added the new proposal would assist the states in securing revenues they need to invest in wellbeing and sustainability, while creating a better tax climate for citizens and businesses.
The “tax action plan’s” initiative includes 25 various measures, which could be summarized in three inter-related packages:
- First, the plan is aimed at assisting the member states in the optimal usage of modern ICT and data technologies to combat and avoid tax fraud, to improve compliance and to reduce administrative burdens in taxation policies. The “plan’s” 25 distinct actions would make taxation both in the EU and in the member states (which are quite different) simpler, fairer and better fit into the modern economy. These actions will make life easier, as the Commission formulated, for “honest taxpayers” (does it seem that most are dishonest?!) by removing all possible obstacles starting from registration and reporting to payment, verification and dispute resolution.
- Second reforming aspect is within the administrative cooperation (so-called DAC-7 Directive) while extending the EU tax transparency rules in the digital platforms, so that those who make money through the sale of goods or services on any digital platforms would also pay their fair share of taxes. In this way, the EU states would automatically exchange information on the revenues generated by sellers on their online platforms. This part of the plan also strengthens and clarifies the rules in other areas in which the states work together to combat tax abuse, for example through joint tax audits.
- Third aspect of the “block” is about “good tax governance”, which is focusing on promoting fair taxation with a view to a complete eradication of unfair tax competition, both among the member states and internationally. The Commission suggests a reform of the Code of Conduct, which addresses tax competition and tackles harmful tax practices in the EU-27.
The plan also proposes improvements to the EU list of non-cooperative jurisdictions, which deals with non-EU countries that refuse to follow some internationally agreed standards. This has, so far encouraged third countries to adopt tax good governance standards, but more needs to be done. The EU-27 will work together with developing countries in the area of taxation, in line with the 2030 Sustainable Development Agenda and SDG-17.
The EII’s comment
The Commission’s official taxation site indicates that setting tax rates is the national states’ competence: some tax rates are coordinated “if differences discourage consumers from buying and selling in other EU countries”; besides, the EU promotes cooperation among the states in tax avoidance and evasion. Nothing else about such a vital issue…
However, the things are much more complicated! To start with, taxation in the treaties is connected to customs union (see: https://ec.europa.eu/taxation_customs/index_en).
For example, in corporate taxation the efforts in “coordinating” member states’ rates started with a communication in October 2001 with plans to remove “harmful obstacles” in the intra-EU trade. See more in: Communication (COM (2001) 582 of 23/10/2001and press release IP/01/1468) based on a detailed study and frequently asked questions MEMO/01/335.
The Commission concluded that in the longer term the member states should agree to allow EU companies to use a single consolidated base for computing tax on their EU-wide profits.
The original CCCTB proposal was optional for all companies and groups of companies. The re-launched CCCTB system will be mandatory for large groups, to cover those with the greatest capacity to tax plan. The system will remain optional for those not captured by the mandatory scope.
Some, however, argue that “any changes to the tax code are likely to meet resistance from some EU countries”, which expect that such reforms would make more harm than good.
Violations of tax rules are numerous: since the start of this century (i.e. during a decade), there were thousands of infringement cases: e.g. see the pending cases and judgments in the latest list (December 2019) in: https://ec.europa.eu/taxation_customs/sites/taxation/files/20191212_court_cases_direct_taxation_en.pdf
Something on the corporate tax reform: the new “tax package” does not cover the issues related to digital taxation or minimum effective taxation; the Commission will present a dedicated action plan on business taxation this autumn. This will take stock of the discussions at the Organization for Economic Cooperation and Development (OECD) on these issues, to which the EU has actively contributed. It will also set out a roadmap for corporate taxation in the EU that is fit to meet the challenges of the 21st century.
The Commission will also work on a new approach to business taxation for the 21st century, to address the challenges of the digital economy and ensure all companies pay their fair share. In the context of the Green Deal, the Commission will make proposals, such as the review of the Energy Taxation Directive so that taxation supports the EU’s objective of reaching climate neutrality by 2050. A review of tobacco taxation and improvement of the rules for cross-border acquisitions of excise goods are also in the pipeline. This should help contribute to other important priorities, such as public health. Finally, taxation clearly plays a central role in the discussion on own resources in the framework of the Recovery Plan.
Source: Questions and answers on the tax package, 15 July 2020, in: